Results 1 to 12 of 12

Thread: here it comes ... US interest rates rising despite FED actions

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default here it comes ... US interest rates rising despite FED actions

    With huge thanks to Tyler Durden at


    (snip)"During the last 31 years of the US Treasury bond rally, the 10Y interest rate has never risen for 10 consecutive days and today's very modest 1.6bps rally ensures that will continue. Yesterday's weakness equaled the previous 9-days-in-row record from 6/26/06. The rise in 10Y rates over this 10 day period equals the Oct 2011 jolt in percentage terms as we hold at those 10/28/11 swing highs in rates. The previous 8 times that 10Y rates have risen for 7 days or more, the next 10 days have seen an average 16bps compression and next 20 days a 31.5bps compression (following the consecutive break). This of course is wreaking havoc with mortgage rates as according to Bloomberg's bankrate.com data, we are back above 4% for the 30Y fixed for the first time this year and this week has seen mortgage rates jump their most in 16 months.

    Falling just short of the 10 days in a row of rate rises for 10 Year Treasuries leaves us equal with the all-time record 9 consecutive days from June 2006...





    and the last 10 days has seen the 10Y match the rates underperformance on a yield-basis of the Oct 2011 peak - as we hold just at those levels today...





    (snip)And Mortgage Rates are back over 4% and have jumped their most in the last week for 16 months...(snip)


    For those Dollar Den readers who don't have a lot of investment experience, there are a number of arguably important take-aways from this economic news ...

    - bond investors experience losses in principal value as interest rates rise. Thus this recent trend change towards higher interest rates incentivizes selling bonds they own and moving that money into stocks or commodities instead. This in turn tends to increase commodity prices thus retail prices for products incorporating those commodities.

    - rising mortgage interest rates 'disqualifies' marginal home buyers, which alters the supply vs demand equation towards future additional declines in housing prices

    - rising interest rates for gov't bonds / mortgage loans usually 'trickle' up to create higher interest rates on other types of loans ( auto, consumer ), which alters the supply versus demand equation towards declining future auto sales and declining big ticket consumer goods sales.

    - rising interest rates increase the 'costs of doing business' for any US businesses that must borrow money domestically ( i.e. 'small businesses' and US only corporations ), which decreases profit margin. This exerts upward pressure on price levels for the products / services they offer in order to restore profit margins to a 'sustainable' level.

  2. #2
    God/dess Zofia's Avatar
    Joined
    Apr 2002
    Location
    Durham, North Carolina
    Posts
    2,417
    Thanks
    2,964
    Thanked 2,370 Times in 934 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    One read of this news is investors are finally feeling a little bit confident and moving away from risk free Treasuries.

    Z

  3. #3
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: here it comes ... US interest rates rising despite FED actions

    ^^^ undoubtedly true for some investors ... but not the major ones like the Chinese. They have been quietly and gradually selling off some of their US gov't bond holdings, and quietly and gradually building 'strategic reserves' of gold, copper, and other commodities.




    Of course, with a home currency denominated in Yuan or Yen or Rupees, holding US treasury bonds denominated in US dollars is blatantly NOT 'risk free' ! If US gov't bonds are paying 3% interest, but the exchange rate value of the US dollar relative to their home currency falls 4%, they have taken a loss !!! Thus once a perception takes root that the US dollar is being 'debased', foreign US treasury bond buyers begin demanding interest rate payments that are high enough to keep pace with the US dollar 'debasement' rate versus their home currency. This phenomenon by foreign bondholders is sometimes referred to as 'bond market vigilantes'

    Buying and holding US gov't bonds is arguably not 'risk free' for Americans either, although most Americans fail to realize losses being incurred in the form of declining 'purchasing power' of their US dollars. However, it is essentially risk free in the short term for the large FED 'member' banks ... who can borrow from the FED at 0.25% interest, use the borrowed money to purchase US gov't bonds paying 3% interest, and 'pocket' the spread.
    Last edited by Melonie; 03-21-2012 at 12:41 AM.

  4. #4
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: here it comes ... US interest rates rising despite FED actions

    again I don't want to spout outright 'gloom and doom' opinions, but there are a few out there ... from


    (snip)"CHINA'S LEVERAGE

    The People's Bank of China owns almost $1.2 trillion in U. S. Treasury debt. It is the largest holder. Close behind is Japan. You can see which nation owns how much of U.S. Treasury debt in the Treasury Department's monthly TIC report.

    Take a look at the report. China held a maximum of a little over $1.3 trillion in July 2011. Then it began to reduce its holdings by about $140 billion by January. The official policy of the bank is for greater diversification. This is a code phrase for "selling US Treasury debt." But there has been no timetable. There have been no official targets.

    We know this: by mid-2011, China had gotten rid of almost all of its T-bills, meaning 90-day IOUs. It was holding U. S. bonds. So, when it ceases to buy bonds that come to maturity, its holdings fall. It does not have to sell T-bonds. It simply lets them mature. The U.S. Treasury must then credit China's account with this money. The central bank takes the money and runs.

    This is what happened to Bear Stearns. The creditors refused to roll over their loans. These were short-term loans. But China's loans to the Treasury are longer-term loans.

    The quiet way to get out of the dollar is to do nothing. Just take the dollars from the Treasury and invest them elsewhere in U.S. markets, or sell them for other currencies.

    It is not clear that China has begun a bank run on the Treasury. But word is beginning to get out. If the bank's present policy continues – a refusal to roll over maturing debt – the Treasury Department will have to find new buyers.

    China is Keynesian. It uses monetary inflation to fund spending, including the purchase of Treasury IOUs. It can spend this on domestic purchases. It will take time to shift from its export-driven policy to a domestic-driven economy. But, either way, it is demand-side economics: Keynesianism.

    China ran a slight trade deficit in February. Oil imports were the main reason. Experts in China's trade say that this was temporary. But they do admit that the surplus this year will be lower. I think the trend is toward a smaller surplus. China needs energy to sustain its growth. It will have to pay for this.

    For as long as the dollar remains the primary currency of oil-exporting nations, oil-importing nations will buy dollars. There is an incentive to get dollars by selling to the USA. But the risk of continuing to hold T-debt is growing.

    There will come a day, just as it came to Bear Stearns, when the refusal of creditors to roll over the debt will increase. Then, without warning, the rollovers will cease. The creditors will decide to keep their dollars and forgo the rollover. On that day, the Treasury will have to go to the FED and demand that the FED buy its debt. That's the supplement benefit of a central bank from the politician's perspective. This will create a moment of truth for American politicians.

    CONCLUSION

    The first indications of a bank run by China have begun. There is no panic yet. The system is bumping along. But if China does not reverse itself soon, it will become clear that the U.S. Treasury is over-leveraged. It has more debt than its income can sustain.

    That is when the Secretary of the Treasury will call the chairman of the Federal Reserve System and ask for a bailout. He will get it, but its effects will not last. There will be another call. As surely as Bear Stearns was followed by Lehman Brothers, so will there be more calls from the Treasury Secretary to the chairman of the FED.

    There will come a day when the FED's chairman treats the Secretary of the Treasury the way that Paulson treated Lehman's Dick Fuld. Let us not forget what happened next.

    Close to 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. In an attempt to meet their own credit needs, Lehman Brothers International routinely re-hypothecated [borrowed against – just as MF Global did] the assets of their hedge funds clients that utilized their prime brokerage services. Lehman Brothers International held close to 40 billion dollars of clients assets when it filed for Chapter 11 Bankruptcy. Of this, 22 billion had been re-hypothecated.

    As administrators took charge of the London business and the U.S. holding company filed for bankruptcy, positions held by those hedge funds at Lehman were frozen. As a result the hedge funds are being forced to de-lever and sit on large cash balances inhibiting chances at further growth. This in turn created further market dislocation and over all systemic risk, resulting in a 737 billion dollar decline in collateral outstanding in the securities lending market.

    That will be played out again on a vastly larger scale when the Treasury's checks bounce. The U. S. Treasury is to Lehman what Lehman was to Bear Stearns.

    When the bank run begins – "Sorry, we have decided not to roll over the debt," the bankruptcies will begin.

    China can trigger it. China Syndrome 2 will come at long last. "(snip)


    While author Gary North is admittedly WAY out of the mainstream, his point about PetroDollars ( see Dollar Den PetroDollar thread ) is nonetheless indisputable. A primary reason that China, Japan and other energy poor but export rich countries needed to hold US dollars in the past was to spend those US dollars purchasing oil from OPEC countries that only accepted US dollars in exchange for their oil. Now that Iran has agreed to sell oil in exchange for Yuan or Yen ( with apparent impugnity ... the last oil exporters to drop US dollar monopoly pricing were Saddam Hussein and Muammar Khadafi ), this 'former' reason for China and Japan to hold large amounts of US dollar denominated assets arguably no longer applies.

    And if China and Japan no longer have a 'forced' reason to buy US treasury bills and bonds, alternate buyers must be found if the US gov't intends to issue more debt to finance more gov't spending. However, those alternate buyers of US gov't debt are far more likely to demand 'compensation' sufficient to offset their currency exchange = purchasing power loss risk. And this means higher ... potentially MUCH higher ... US interest rates.

    If author Gary North is correct, there are three theoretical future outcomes. The first is for the US, by whatever means, to 'pursuade' Iran to return to US dollar monopoly sales of exported oil in the same way that Saddam and Khadafi were 'pursuaded' - which would re-establish a requirement that China and Japan hold large amounts of US dollar denominated assets, and re-establish demand for future US treasury bonds at manageable interest rates. The second is for the US to radically alter it's tax revenue / gov't spending levels in order to eliminate the need for future sales of large amounts of US treasury bonds - which would greatly reduce rising interest rate pressures by vastly reducing the supply of new US treasury bonds on the auction block, but which would also potentially trigger an economic depression plus riots in the streets. And the third is, as Gary North pointed out, for the US gov't to continue present tax and spend policies, to continue to issue large amounts of new US treasury bonds to fund the continued deficit spending, and to 'force' the FED to purchase those newly issued US treasury bonds at comparatively low interest rates - which would in turn require massive FED printing of new US dollars to fund those US treasury bond purchases with associated US dollar devaluation, US price increases etc. The latter is typically described by the term 'monetization of debt' - and has a fairly ugly past track record !

    Actually there is a fourth theoretical future outcome - the US outright defaulting on repayment of US treasury bond principal as existing bonds mature. However, the odds of this happening are infinitesimally small, since the global side effects would be cataclysmic.
    Last edited by Melonie; 03-21-2012 at 03:03 AM.

  5. #5
    Veteran Member
    Joined
    Jul 2011
    Posts
    455
    Thanks
    53
    Thanked 175 Times in 109 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    An interesting thing to see...... How much interest income has been lost due to the ZIRP policy?
    The country has been looted.

  6. #6
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: here it comes ... US interest rates rising despite FED actions

    ^^^ about the same amount as the interest EXPENSE that was saved by the US gov't !

  7. #7
    Featured Member Vamp's Avatar
    Joined
    Jul 2004
    Location
    Missouri
    Posts
    1,111
    Thanks
    271
    Thanked 757 Times in 289 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    Quote Originally Posted by Melonie View Post
    For those Dollar Den readers who don't have a lot of investment experience, there are a number of arguably important take-aways from this economic news ...

    - bond investors experience losses in principal value as interest rates rise. Thus this recent trend change towards higher interest rates incentivizes selling bonds they own and moving that money into stocks or commodities instead. This in turn tends to increase commodity prices thus retail prices for products incorporating those commodities.

    - rising mortgage interest rates 'disqualifies' marginal home buyers, which alters the supply vs demand equation towards future additional declines in housing prices

    - rising interest rates for gov't bonds / mortgage loans usually 'trickle' up to create higher interest rates on other types of loans ( auto, consumer ), which alters the supply versus demand equation towards declining future auto sales and declining big ticket consumer goods sales.

    - rising interest rates increase the 'costs of doing business' for any US businesses that must borrow money domestically ( i.e. 'small businesses' and US only corporations ), which decreases profit margin. This exerts upward pressure on price levels for the products / services they offer in order to restore profit margins to a 'sustainable' level.
    I know you are talking about the average mortgage interest rate but I would argue that increase has already happened in some areas of the country. Namely because of risk and change in regulation. When I was last in the trenches the rate was trending towards 6% for a 30yr fixed.

    The thing that isn't talked about much is the change in mortgage financing regulations and their impact on the markets. For example condo financing regulation. Now condo associations must be 51% owner occupied in order for Fannie or Freddie to back them. Sounds simple until you realize that most condos are rented out, in default, or part of a time share. If the association refuses to divulge their occupancy status, all financing for them is declined. There are pockets of areas in this country that have been totally devastated by this regulation. It has basically turned the condo market into a cash only transaction. The few that do qualify are seeing a higher interest rate for their purchase. With the increase in risk comes the increase in rates... not by the fed but by the banks themselves.
    Nature knows no indecencies; man invents them. ~ Mark Twain


  8. #8
    Featured Member Vamp's Avatar
    Joined
    Jul 2004
    Location
    Missouri
    Posts
    1,111
    Thanks
    271
    Thanked 757 Times in 289 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    Quote Originally Posted by Melonie View Post
    Buying and holding US gov't bonds is arguably not 'risk free' for Americans either, although most Americans fail to realize losses being incurred in the form of declining 'purchasing power' of their US dollars. However, it is essentially risk free in the short term for the large FED 'member' banks ... who can borrow from the FED at 0.25% interest, use the borrowed money to purchase US gov't bonds paying 3% interest, and 'pocket' the spread.
    This should be on the front page of every newspaper.
    Nature knows no indecencies; man invents them. ~ Mark Twain


  9. #9
    Veteran Member
    Joined
    Jul 2011
    Posts
    455
    Thanks
    53
    Thanked 175 Times in 109 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    Quote Originally Posted by Vamp View Post
    This should be on the front page of every newspaper.

    The Corporate Media for over 20 years now, has been complicit in all the looting...... The banks are more important...... Get used to it, and the fact only alternative media outlets do any reporting.... Check out Matt Taibbi sometime...... Here is a fuuny one.


    http://www.rollingstone.com/politics...ilout-20110411
    The country has been looted.

  10. #10
    God/dess
    Joined
    Sep 2006
    Posts
    7,964
    Thanks
    6,155
    Thanked 10,183 Times in 4,602 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    Quote Originally Posted by Melonie View Post
    again I don't want to spout outright 'gloom and doom' opinions, but there are a few out there ... from http://lewrockwell.com/north/north1109.html
    Then why are you doing it?

  11. #11
    God/dess
    Joined
    Sep 2006
    Posts
    7,964
    Thanks
    6,155
    Thanked 10,183 Times in 4,602 Posts

    Default Re: here it comes ... US interest rates rising despite FED actions

    Quote Originally Posted by Melonie View Post

    Buying and holding US gov't bonds is arguably not 'risk free' for Americans either, although most Americans fail to realize losses being incurred in the form of declining 'purchasing power' of their US dollars. However, it is essentially risk free in the short term for the large FED 'member' banks ... who can borrow from the FED at 0.25% interest, use the borrowed money to purchase US gov't bonds paying 3% interest, and 'pocket' the spread.
    Inflation-protected US government bonds are pretty 'risk free'.

  12. #12
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: here it comes ... US interest rates rising despite FED actions

    ^^^ admittedly TIPS bonds have a lower loss risk due to future declines in the US dollar's purchasing power. However, they're not risk free ... since the interest rate paid on TIPS bonds is based on the official US gov't inflation number, which typically understates the actual rate of inflation.

Similar Threads

  1. Replies: 5
    Last Post: 02-22-2010, 05:27 AM
  2. Replies: 4
    Last Post: 12-17-2009, 10:15 AM
  3. Replies: 4
    Last Post: 01-02-2008, 03:38 PM
  4. Replies: 6
    Last Post: 09-26-2007, 03:36 PM
  5. Interest rates are rising like a rocket ...
    By Melonie in forum Dollar Den
    Replies: 1
    Last Post: 08-01-2003, 11:18 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •